Law Reform: red tape on small businesses eased but concern over retreat on common law

Solicitors warned of confusion and inflexibility over directors' responsibilities this week, as the 885-section Company Law Reform Bill received its first reading in the House of Lords.


The Bill will oblige directors to have regard to the longer-term interests of employees, suppliers, consumers and the environment, as well as shareholders.


Richard Paton, a partner at Hill Dickinson in London and a member of the Law Society's company law committee, said: 'The directors' duties [in the Bill] are too inflexible. The committee has been opposed to codification all throughout the process. In practice, it is very difficult to codify duties which have developed through the common law, and are constantly evolving. For example, there have been changes in emphasis recently in relation to companies that are approaching insolvency.


'The duty to act for the success of a company will not always be appropriate - not every company has the object of making a success of its business, charities being the obvious example.'


Peter Bohm, a partner at City firm Bates Wells & Braithwaite, said: 'The provisions relating to directors' duties are intended to clarify, and I hope that in the long term they will make the law clearer. Duties will still continue to evolve in case law.'


Under the Bill, the regulatory burden on small businesses will be lessened by simplifying the rules for forming a company, and abolishing the requirement for a company secretary and annual general meeting. The Department of Trade and Industry claims the proposals will save business £250 million.


Mr Bohm said: 'I welcome the attempt to make life easier for smaller companies. I hope that a piece of legislation which has 885 sections and 509 pages will actually have that effect. There is an awful lot of legislation there.'


Oliver Barnes, a partner at City firm Travers Smith, said: 'It is a shame we are still going to have two Companies Acts, rather than a consolidated Act. Practitioners will still need to keep referring back to the 1985 Act.


'On a legal level, there will be difficulty marrying the new code with the existing provisions. It says you can forget the common law, but then you have to apply the new provisions in light of the common law.'


Mr Paton added: 'The idea of the Bill is that it is "small first". The current law is written mainly for public companies, with a carve-out for private firms. This Bill sets out the law as it applies for private companies and separately states the position for public. That ought to be easier for the vast majority of companies.'